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This article will cover 3 things that women can do to protect their investments for the time when the stock market finally does reach its peak.
So far, the stock market has had a good year. Both the Standard & Poor’s 500 and the Dow Jones have continued to go up, extending the bull market that started in 2009. But many analysts think that this rise is unwarranted. They say that there is too much money in the system and, though there may still be some time left before the market hits its peak, the market is definitely overvalued.
Determining a Stock Market Bubble
The question that seems to be on the minds of most investors right now is whether or not the market is overvalued. Many analysts agree that we are. Earnings at companies in the S&P 500 grew at an 11 percent rate in 2013 and the Dow and S&P 500 both recently passed their all-time highs. But the consensus among market strategists is that profit growth will begin to slow. We have already seen momentum stocks, like Twitter and Facebook, and biotech stocks start to show signs of weakness.
The Daily Ticker’s Henry Blodget is predicting that a stock market bubble-burst could be coming because stocks, he says, are radically overvalued. He explains the reasoning behind this theory in this January 2014 Business Insider article. “The higher up we go, the more scared I get,” he says. He speculates that stocks could go higher, even double, from current trading levels but “at some point we’re going to revert to long-term means.” He believes that stocks are now so expensive that they will likely deliver terrible performance over the next decade and that there is a chance that that stocks could fall up to 50% in the next couple years. Bonds are facing the same fate as stocks, says Blodget, and investors need to prepare themselves for poorer performance in the next seven to 10 years.
Step #1: Change Your Investment Selection Process
So, if there is, in fact, a stock market bubble, what should women be doing to protect their investments? Take your profits and head for the sidelines? Well, no. Seven to 10 years is a long time to sit out. Plus, you never know when the drop will occur and stocks could go a lot higher before that happens. Instead of opting out, change what you look for.
In the bull market of 2013, many investors were able to successfully use technical analysis to pick stocks. With this method, investors do not have to research the corporation, it’s place in the market, or its financial statements to choose a successful stock. The only consideration is price and movement. If you’ve been choosing stocks based on past price and volume movements, without considering what a company does, this describes you. In contrast, fundamental analysis looks at a company’s financial statements to predict a trend and try to guess where a stock is headed.
Now that the markets are overvalued, it is important for investors to look for higher earnings growth to justify any upward price movement. You can only understand a company’s potential for growth if you perform a fundamental analysis.
Step #2: Look for Value and Buy on Weakness
Of course investors are unhappy that stock prices on many quality companies are overvalued, but they are all choosing different strategies to deal with it. Many are accumulating cash and waiting for lower prices. Others continue to search for bargains. Matt Koppenheffer of the Motley Fool suggests that sitting out is not a good option. He says finding value is still an option and he suggests that the answer might be to head to more obscure areas of the market–small, uncovered, often international stocks.
There will always be a handful of companies that are competing for your investment dollars, so look for companies that are well valued and then perform a technical analysis to select the ones you like best. Do the work to make sure that you are getting an asset that is worth more than what you’re paying for it. If you put in the work, you should always be able to find enough quality companies in almost any stock market environment. “Opportunistic investors can still find huge winners,” says Koppenheffer.
Step #3. Screen Investments Continually
Develop a list of companies that would be your top picks any time there is a dip in the market and maintain a continual screening process. You should analyze your companies as thoroughly as possible so that you can pull the trigger at a moment’s notice.
Focus on selecting fundamentally sound companies that will deliver profits growth, which will ultimately lift stock prices.
Don’t put the horse before the cart. I see people jumping in all of the time without doing any research. I think when it hits rock bottom, sometimes people just freak out and don’t think they can work through a bubble bursting. High’s and low’s happen when you invest, that is part of the process.
Great advice, especially with #2. Leaping on a trend isn’t always the smartest thing to do. Researching which stocks will likely increase in value can lead to great returns.
You could have taken the word female out of the title, and it still would have had the same effect. There is a lot of good advice there.
Developing a list is pretty ingenious I think. It’s a really good way to stay on top of the game without being shady about it.
Screening continually should be done year-round regardless of where the market is. It may be time-consuming and monotonous but it can pay off big when you least expect it.